To the annoyance of some shareholders, 1-800-FLOWERS.COM (NASDAQ:FLWS) shares are down a considerable 32% in the last month. That drop has capped off a tough year for shareholders, with the share price down 34% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Does 1-800-FLOWERS.COM Have A Relatively High Or Low P/E For Its Industry?
1-800-FLOWERS.COM's P/E of 18.90 indicates relatively low sentiment towards the stock. The image below shows that 1-800-FLOWERS.COM has a lower P/E than the average (21.5) P/E for companies in the online retail industry.
Its relatively low P/E ratio indicates that 1-800-FLOWERS.COM shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with 1-800-FLOWERS.COM, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It's great to see that 1-800-FLOWERS.COM grew EPS by 22% in the last year. And earnings per share have improved by 17% annually, over the last three years. With that performance, you might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting 1-800-FLOWERS.COM's P/E?
With net cash of US$201m, 1-800-FLOWERS.COM has a very strong balance sheet, which may be important for its business. Having said that, at 25% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On 1-800-FLOWERS.COM's P/E Ratio
1-800-FLOWERS.COM has a P/E of 18.9. That's higher than the average in its market, which is 12.5. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it does not seem strange that the P/E is above average. Given 1-800-FLOWERS.COM's P/E ratio has declined from 27.8 to 18.9 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than 1-800-FLOWERS.COM. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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